The World Bank’s latest International Debt Report showed that developing countries spent a record $1.4 trillion (R25trl) to service their foreign debt as their interest costs climbed to a 20-year high in 2023.
Higher interest rates meant that servicing that debt surged by nearly a third to $406 billion, squeezing the budgets of many countries in critical areas such as health, education, and the environment.
In South Africa, the Medium-Term Budget Policy Statement (MTBPS) tabled on October 30 showed that debt service will consume a fifth of revenue this fiscal year. Over the past 15 years, public debt has accumulated, driven by a wide gap between spending and revenue. This led to increasing debt service costs consuming resources that could have been used for priorities such as education, healthcare and infrastructure.
The World Bank said the financial strain was fiercest for the poorest and most vulnerable countries, that is those countries eligible to borrow from the World Bank’s International Development Association (IDA).
These poor countries paid a record $96.2bn to service their debt in 2023. Although repayments of principal decreased by nearly 8% to $61.6bn, interest costs surged to an all-time high of $34.6bn in 2023, four times the amount a decade ago.
On average, interest payments of IDA countries now amount to nearly 6% of the export earnings of IDA-eligible countries - a level that hasn’t been seen since 1999. For some countries, the payments run as high as 38% of export earnings.
Indermit Gill, the World Bank Group’s chief economist and senior vice president, said “Multilateral institutions have become the last lifeline for poor economies struggling to balance debt payments with spending on health, education, and other key development priorities.
“In highly indebted poor countries, multilateral development banks are now acting as a lender of last resort, a role they were not designed to serve. That reflects a dysfunctional financing system: except for funds from the World Bank and other multilateral institutions, money is flowing out of poor economies when it should be flowing in,” he added.
The Covid-19 pandemic sharply enlarged the debt burdens of all developing countries—and the subsequent surge in global interest rates has made it harder for many to regain their footing. At the end of 2023, the total external debt owed by all low- and middle-income countries stood at a record $8.8trl, an 8% increase over 2020. The percentage increase was more than twice as large for IDA-eligible countries, whose total external debt climbed to $1.1trl, an increase of nearly 18%.
The World Bank last year said that one of every four developing countries is effectively priced out of international capital markets. In the past three years alone, the number of sovereign debt defaults in these countries have surged to 18, outstripping the total of the previous two decades.
For the poorest countries, debt has become a nearly paralysing burden: 28 countries eligible to borrow from the World Bank’s IDA are now at high risk of debt distress. Eleven are in distress.
“These developments constitute a grave danger to prospects for progress on global development goals. Developing countries today also confront higher energy prices, steeper interest rates, and geopolitical turmoil in key regions of the world. It is a combustible mix—not unlike the conditions 50 years ago that prompted the World Bank to take a crucial step to advance debt transparency across the world,” the World Bank said in its 2023 International Debt Report.
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